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Congress will soon be back from recess – and back to gnashing its teeth over the budget and the various important things that, too many in that branch of government now assert, our country can no longer afford to do. One way to enlarge their sense of the possible: consider a source of revenue they have so far largely ignored – a small tax on sales of stocks, bonds, and complex financial instruments.

How small? Really, really small. A bill co-introduced by Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D-Ore., calls for a tax of 0.03 percent – that’s 30 cents per $1,000. Yet even at that exceedingly modest level, a Wall Street speculation tax (also known as a financial transaction tax or FTT) would generate more than $350 billion over the coming decade, according to a non-partisan analysis of similar legislation introduced in 2012.

So we are talking about serious money, and a proven way to raise it. Similar taxes already exist in more than 30 countries, including the United Kingdom, South Korea, South Africa, India, Hong Kong and Brazil. Encouraged by their experience, France, Germany, Italy, Spain and seven other European countries are moving forward with plans to adopt a coordinated speculation tax.

It’s a tax – no getting around that. But it’s also a way to help close what amounts to a huge tax loophole. Americans pay sales taxes on all manner of goods and services. Wall Streeters don’t pay sales taxes when they buy and sell securities. That fact helps explain why the financial sector, which generates some 30 percent of the nation’s total corporate profits, pays only about 18 percent of corporate taxes.

Revenue and fairness aside, a speculation tax can be crafted to reduce short-term bets and market volatility, drawing resources out of empty financial gamesmanship and back into job-creating private and public investment. That would be a strong argument for such a tax even if federal tax rates were not at a half-century low and the country badly in need of revenue.

This unusual combination of benefits explains why Bill Gates, Warren Buffett, former Federal Deposit Insurance Corp. chair Sheila Bair and Vanguard founder John Bogle, among other business leaders and economists, have spoken up for the idea.

Lined up on the opposite side of the question, unsurprisingly, are the Financial Services Roundtable, the Securities Industry and Financial Markets Association and various other spokesgroups for the big banks and hedge funds. Not because of the impact on their own bottom lines, they are quick to insist. In the long Washington tradition of big fry hiding behind small fry, they tell us that the burden of a speculation tax would ultimately fall on investors, retirees, business owners and everyday folks.

But that’s a claim that wilts under the briefest scrutiny. People who use the financial markets to borrow, invest, save for retirement or manage risk would scarcely notice a 0.03 percent tax; they already pay far more in exchange fees, clearing fees, fund management fees and other costs built into the financial system. For someone purchasing $10,000 of stock, the tax would be all of $3. Even that bit of simple math overstates the impact, since the existence of such a tax would likely lead to less frequent trading. Dean Baker of the Center for Economic Policy and Research argues that most investors would “end up spending roughly the same – or even a lower – total amount on their trades.”

The industry’s other main line of argument – that a speculation tax would damage U.S. competitiveness and economic growth – runs aground on the successful experience of the U.K. and Hong Kong, two global giants of finance. It also collides with the fact that the United States itself had such a tax for much of the 20th century, with none of the dire consequences cited by today’s critics.

One subsector of modern finance – the high-frequency traders who buy and sell in a time frame of seconds or minutes – might face a serious competitiveness problem; but that would be a blessing for the country as a whole. Even a minuscule speculation tax could throw a monkey-wrench into their business model. But much of what high-frequency traders do amounts to little more than glorified front-running or insider trading, based on privileged knowledge of breaking market trends. When they get things wrong, they cause debacles like the “Flash Crash” of May 2010; when they get things right, they extract money from the real economy to no purpose other than their own enrichment.

The Wall Streeters have one compelling reason for opposing a speculation tax. They are battling against this idea out of an entirely reasonable concern that, once on the table, it will prove to be too attractive, and too sensible, for policymakers to resist.

Over the last 15 or more years, state attorneys general and legislatures, Congress, federal regulators, consumer and faith groups and even the Pentagon have played a game of “Whack-a-Mole” against the high-cost predatory lending industry, which offers payday and other unsustainable triple-digit APR short-term loans. States have imposed interest-rate caps and strictly regulated lender practices. Military leaders pushed Congress to enact the 2006 Military Lending Act. The Federal Deposit Insurance Corp. and other regulators have taken action to end “rent-a-bank” payday lending.

Progress has been made. Fewer and fewer states throw out the welcome mat to those peddling what the Consumer Financial Protection Bureau, in a recent study, called “debt traps.”

The lenders have fought back in a variety of ways, though. If a law restricts loans made for less than 31 days, they write a 32-day package. If a law restricts high-cost closed-end credit, they redefine their product as an open-end loan. If a state bans payday lending outright, they play hard-to-find and hard-to-get.

The Internet has proven to be a very useful hiding place for these characters. One of their more successful recent stratagems has been to set up shop online, often off-shore but sometimes – in a legerdemain called “rent-a-tribe” – through a ginned-up relationship with a “sovereign” Native American tribe theoretically not subject to state laws. Often, the online lenders operate through a “lead generation” website, which functions as a kind of snare or trolling net for borrowers. The lead site then “sells” the prospective customer to the highest predatory bidder.

Now, as Pro Publica explains, regulators are focusing on the banks, which have become a “critical link” between customers and payday lenders, according to the New York Times, by providing them with a crucial new tool: direct access to bank accounts. Instead of waiting for someone to show up at a storefront with a payment, the lenders and fraudsters, too, get to simply deduct (debit) the money from the customer’s bank account, through what is called the automated clearing house (ACH) system. At a recent congressional hearing, “Mark Pearce, director of FDIC’s division of depositor and consumer protection, called the banks the “gatekeepers” to the ACH system.”

As far back as 2007, the U.S. Attorney’s office in Philadelphia took on “criminals bilking the elderly,” as the New York Times then reported, by going after a group of banks, including Wachovia (now part of Wells Fargo), that were providing merchant and ACH services to the fraudsters. Even the Office of the Comptroller of the Currency, at the time a classic captured regulator (but now under new and better management), was forced to impose penalties and, eventually, a modest consumer restitution order.

Of course, the banks learn slowly, and others did not get out of the business after Wachovia was ordered to. So, today, we welcome the intensified investigations by the U.S. Department of Justice, the CFPB, the FDIC, the OCC, the New York Department of Financial Services, the FTC, other agencies and state attorneys general to choke off illegal high-cost lending at the bank bottleneck.

For all the mystique surrounding its monetary policy powers, the Federal Reserve is also a regulatory agency. In fact, it’s the heavyweight of Washington’s financial watchdogs. The outsized role of the Fed has, if anything, been increased by the process of financial reform, in ways that should be a central consideration in the selection of the next Federal Reserve chair.

Before the financial crisis, the Federal Reserve already played a central role in financial regulation. The Fed had primary oversight over bank holding companies, the industry’s largest entities. That made it the primary regulator of Citigroup, as well as of HSBC, the largest subprime lender, and Countrywide, the third largest subprime lender. The Federal Reserve also had primary authority for implementing and enforcing consumer protection laws on high-cost subprime mortgages.

It’s clear that the Federal Reserve, like just about all of the federal financial regulators, fell down badly on the job in the buildup to the financial crisis. Not only did it fail to act to stop the abusive and irresponsible lending that fueled the housing bubble, it failed to consider the ways in which excessive leverage and complex derivatives would multiply the impact of a housing collapse, turning it into a global financial catastrophe.

At the same time, there were limits on the Fed’s pre-crisis authority. Large banks could escape its oversight by choosing a different regulator (as Countrywide eventually did in 2007). In addition, the Fed had no jurisdiction over freestanding non-banks that had become central to the financial system, including major investment banks such as Lehman Brothers. The Fed also faced procedural obstacles in gaining full regulatory power over non-bank subsidiaries of bank holding companies.

The Dodd-Frank Act takes a dual approach to Federal Reserve authority. In the area of consumer protection, the dismal record of the Fed – and other safety and soundness regulators – in preventing exploitative and dangerous consumer lending convinced lawmakers that we needed a single agency with the focused mission of consumer protection. Thus, Congress removed many of the Fed’s consumer protection powers and transferred them to the Consumer Financial Protection Bureau.

But in the area of regulating systemic financial risk, Congress significantly expanded the Federal Reserve’s powers and essentially confirmed its lead role as the primary watchdog of overall financial stability. Now more than ever, the Federal Reserve is the central regulator of the financial system. The Dodd Frank Act expanded the agency’s role as the primary supervisor of:

Bank holding companies. The Fed had this role before Dodd-Frank, but the Dodd-Frank Act made it impossible for bank holding companies to shop around for a more lenient supervisor, and also expanded supervisory powers in other ways.

Large non-banks determined to be systemically significant. The Fed will now supervise large entities central to the financial system even if they are not banks.

Important financial utilities. The Fed now plays a key role in supervising organizations central to the “plumbing” of the financial system, such as clearinghouses or payment systems.

This expanded jurisdiction came with a substantial increase in rule-writing responsibilities. Responding to the problems revealed by the financial crisis, Congress directed the Fed to improve the system of prudential regulation for large institutions by:

Increasing minimum capital levels (or, to put it another way, maximum permitted levels of borrowing and leverage) for large bank holding companies, and deciding just how much those levels should increase with bank size.

Designing and supervising regular “stress tests” of key financial institutions to be sure they are prepared for potential financial disruptions.

Exercising discretionary power to break up a “too big to fail” bank or to limit its activities, including activities in key commodity markets

In these areas, it is the Fed that writes the rules and supervises their enforcement. And it has vast discretion to do so. While the Financial Stability Oversight Council has advisory input, these rules are almost completely under the Fed’s control. There is little or no space for appeal, for example, by anyone who might consider its rulemaking or enforcement lax.

In other realms of Dodd-Frank implementation (including the Volcker Rule’s ban on proprietary financial speculation by banks), the Fed plays an influential role in a joint decision-making and enforcement process with other agencies. These other agencies still play a key role in supervision, including through oversight of important subsidiary entities within bank holding companies. The U.S. financial regulatory framework remains quite fragmented in many ways. But the Fed’s expanded powers clearly give it primary responsibility for ensuring the overall stability of the financial system.

This central regulatory role of the Fed, especially post-Dodd Frank, should be a key consideration in the appointment of the next Federal Reserve chair. In appointing the next leader of the Federal Reserve, President Obama will also be appointing the person who should be the lead watchdog of Wall Street.

On the eve of its August recess, Congress finally agreed to undo much of a sharp rise in the interest charged on federal student loans. Before the deal could even be signed into law, however, a group of private lenders was angling to postpone the day when they would have to say how the cost of their loans compares to the new, lower-than-feared cost of the government’s loans.

In a letter to Richard Cordray, Director of the Consumer Financial Protection Bureau, the Consumer Bankers Association, the Student Loan Servicing Alliance, the Education Finance Council and the National Council of Higher Education Resources pleaded for a 30-day ”grace period” on the disclosure requirement. They were making a “very reasonable request,” the private lenders argued, in view of the “multiple application processes (electronic, paper and telephone) that must be changed and tested prior to implementation” and the difficulty of coordinating with “multiple vendors.”

But this is no ordinary 30 days. As the lenders themselves pointed out in their letter, August is “peak season for lending… as students and their families put together the financing they will need to start school in the fall term.” To put it another way, this is precisely the time when students have the greatest need to “know before they owe” – that is, to understand the higher cost of a private loan before they forego a federal loan.

“Private loans are one of the riskiest, most expensive ways to pay for college,” Lauren Asher, President of the Institute for College Access & Success, declared in a letter of response to the CFPB. Private loans, she added, “do not provide the important deferment, income-based repayment, and loan forgiveness options that accompany federal student loans.”

Disclosure is crucial because, as the TICAS letter points out, “a majority of undergraduate private loan borrowers do not borrow the maximum amount in safer federal student loans first… Indeed, we are concerned that private lenders appear to be increasingly marketing private loans as an alternative to federal loans, rather than a supplement.”

If the Department of Education doesn’t need a grace period on implementing the new federal loan interest rates, Asher argued, private lenders shouldn’t need any extra time to provide honest disclosure.

In fact, they have shown some pretty serious chutzpah by even asking for such an extension.

When Elizabeth Warren, D-Mass., and John McCain, R-Ariz., get together, it gets noticed. In partnership with Sens. Maria Cantwell, D-Wash., and Angus King, I-Maine, they have introduced a bill, the “21st Century Glass Steagall Act,” notable both for its substance and as a call to action on one of the great unaddressed challenges of financial reform: the trend of accelerated concentration that has left us with an industry dominated by a handful of giant, multi-purpose, dangerously opaque and conflicted institutions far too caught up in speculative games to attend to their rightful job of supporting investment and entrepreneurship and broad prosperity.

Like its New Deal-era namesake, the bill would erect a wall between traditional banks and the risky world of investment banks and hedge funds. Their proposal updates the original law in thoughtful ways, by, for example, barring bank involvement in a range of dealer, trading and derivatives market activities, while preserving the ability of banks to engage in traditional trust and fiduciary roles.

21st century finance needs such a law for the same reasons 20th century finance did: to prevent bankers from using insured deposits and other taxpayer-supported advantages to enrich themselves; to reduce the conflicts of interest that encourage the mislabeling and overmarketing of high-risk investments; and to keep banks from leveraging their power and pivotal economic role to encroach on the territory of non-financial businesses or simply to overcharge their customers.

Wall Street has settled on a simple line of attack: Glass-Steagall, industry leaders and lobbyists insist, would not have prevented the financial meltdown of 2008. Indeed, the four Senators have not advertised their proposal as a magic bullet, eliminating the need for such measures as stronger capital and leverage rules and more transparent derivatives markets.

But there is a lot that it could do. Insiders without an immediate material stake in the question argue that a strong Glass-Steagall law could have limited the scope and damage of the meltdown, much as better compartments could have saved lives on the Titanic. Former Citigroup co-CEO John Reed, for one, believes “we would’ve hit the iceberg anyway,” but the flooding “might not have spread throughout the whole ship.”

The critics point out that pure investment banks such as Lehman Brothers and Morgan Stanley were in the vanguard of the bad practices propelling the financial system toward disaster. But the lines between commercial and investment banks had been badly eroded by decades of deregulation, spurring competition from commercial banks that helped drive investment banks into the dangerous business of making long-term financial commitments with deposit-like instruments and other kinds of short-term debt.

In any case, the rationale for this legislation goes beyond safety. It would gradually require the biggest banks to downsize along functional lines. By removing some of the artificial advantages of enormous size in finance, Warren-McCain-Cantwell-King would create new running room for institutions, including many community banks and credit unions, that have stuck to the old-fashioned model of taking in deposits and giving out loans – only to lose more and more business to the six megabanks, which now hold double the assets of numbers seven through 50 combined. And since small businesses often don’t get much respect from big banks, “Anything that tilts the playing field back toward smaller financial institutions is good for the small business sector,” Simon Johnson of MIT points out.

Like another bipartisan measure – the bill introduced by Sens. David Vitter, R-La.,and Sherrod Brown, D-Ohio, to set higher capital requirements for the biggest banks – Warren-McCain-Cantwell-Kingreminds us of a long lineage of free-market conservatives, going back all the way to Adam Smith, who have advocated strong regulation of the financial sector, not just because of its propensity for panics tending to cause wide and prolonged economic distress, but also because of its importance as an element of core economic infrastructure.

The original Glass-Steagall Act was a response to the specific misdeeds that produced the banking industry collapse of early 1933. But, in reining in an overly reckless and powerful industry, it bore the influence of a tradition of reform measures that, from the Interstate Commerce Act on, had required companies with a role in running the essential networks of the economy to stick to one line of business and provide even-handed service to all.

Under Glass-Steagall, banking became more boring and less profitable. The bankers of the 1930s didn’t welcome that prospect any more than today’s bankers do. But they lived with it, quite comfortably, for a long time, and so did the country as a whole. In fact, Glass-Steagall was part of a body of financial regulation that stands as one of the great success stories of American public policy, giving us half a century without major bank failures and contributing to a period of unprecedented growth and prosperity which saw the emergence of a middle class that was the envy of the world.

As banking becomes more boring again, we might just see a burst of enterprise and ingenuity where we really want it – in the real economy instead of the financial economy.

The financial industry is extremely good at evading taxes. That’s one of the takeaway messages of Offshore Shell Games, a report released this week by U.S. PIRG. CitiGroup, Goldman Sachs, Wells Fargo, Morgan Stanley, and JPMorgan Chase have ducked a combined tax bill of $27 billion, the report estimates, by funneling profits to overseas subsidiaries that are often nothing more than P.O. boxes.

“Loopholes in the tax code make it legal to book profits offshore, but tax haven abusers force other Americans to shoulder their tax burden,” the report points out. “Every dollar in taxes that corporations avoid by using tax havens must be balanced by other Americans paying higher taxes, coping with cuts to government programs, or increasing the federal debt.”

Such practices are “ubiquitous among the largest 100 publicly traded companies as measured by revenue.” Altogether, those 100 companies are holding some $1.17 trillion in offshore tax havens, the report estimates.

When Wells Fargo turned down Annette Smith, a 69-year old widow living off of social security, for a small personal loan to get her car fixed, the bank recommended its online Deposit Advance Program. With the click of a button, she got the $500 she needed. But the short-term, high interest loan ensnared her in a vicious years-long cycle of borrowing.

As soon as Smith’s social security check hit her account, Wells automatically deducted the full amount of the advance plus a $50 service fee. That amounted to more than half her income, and with no friends or family in a position to help and the bank refusing to let her pay in installments, she had no choice but to keep taking deposit advances to make ends meet. “A few times I tried not to take an advance, but to do that, I had to let other bills go. The next month those bills were behind and harder to pay.” By the time she finally broke the cycle with the help of the California Reinvestment Coalition, she had paid nearly $3000 in fees on 63 advances over 5 years.

Smith testified at a payday-loan briefing session held by the Senate Special Committee on Aging. “I never considered going to one of those payday loan stores,” she said, “because I knew they had a reputation for charging really high interest rates. I thought that since banks were required to follow certain laws, they couldn’t do what those payday loan people were doing.” She found out the hard way: banks have their own payday-loan style products, and they aren’t necessarily any safer than the storefront kind.

“Banks call these deposit advances, but they are designed to function just like any other payday loan.” Rebecca Borné, Senior Policy Counsel at the Center for Responsible Lending, told the committee. Deposit advance users remain in debt an average of 212 days a year, she said. On average, they “end up with 13 loans a year and spend large portions of the year in debt even as banks claim the loans are intended for occasional emergencies.”

Richard Hunt, President of the Consumer Bankers Association, said it was wrong to equate deposit advances with payday loans. Payday lenders offer their high-interest products to anyone, he explained, while banks like Wells provide deposit advances as a “service” to established customers, charging “line of credit fees” instead of interest.

Senator Joe Donnelly (D-Ind.) asked Hunt if he considered it appropriate “for some of the most respected banking names to be making 200% plus off of their customers.”

Deposit advance customers aren’t paying interest at all, Hunt insisted. But as Borné pointed out, the fees work out to the equivalent of up to 200% in annual interest, and banks that make such loans generally structure them to avoid standard interest-disclosure requirements.

Hunt was asked whether a customer with an “established relationship” might be entitled to a bank’s help in finding better ways to borrow. Banks “text people, mail people, and do everything but fly a helium balloon over their heads saying there could be a less expensive item,” Hunt replied. “At the end of the day it’s up to the consumer to choose which product they want to have.”

Wells Fargo is one of six banks that “have now joined the ranks of the payday lenders,” Borné testified. “These banks make payday loans even in states where laws clearly prohibit payday lending by non-banks…” There’s a danger, she added, that bank payday lending will spread until it becomes the norm. “We are at a tipping point,” she warned.

Americans have learned a lot in recent years about how our largest financial institutions make their money. But few would have imagined that a million and a half tons of aluminum – a quarter of the national supply at any given moment – typically sits in a network of 27 Detroit warehouses owned by Goldman Sachs. And hardly anyone would have thought that manufacturers seeking to purchase that aluminum might wait 18 months or more for delivery, while warehouse owners like Goldman Sachs collect additional rent, paid for by consumers of aluminum products ranging from beer cans to home siding.

In an important hearing yesterday before the Senate Banking Committee, Tim Weiner of MillerCoors described the operation and how it boosts prices for real-economy companies. The witnesses at yesterday’s hearing explained how the largest Wall Street banks have accumulated massive amounts of physical commodity infrastructure, ranging from warehouses to oil tankers to power generation plants.

Supply bottlenecks in bank-owned warehouses are only one part of the story. Banks are central players in the financialization of commodity markets, the treatment of physical commodities as purely financial assets to be manipulated for trading and investment purposes, rather than inputs for the real economy.

The original purpose of markets in commodities and commodity derivatives was to ensure steady prices and consistent availability for real-economy users of commodities. But the selling of commodities as an inflation hedge and a retirement asset (over $440 billion in investor money has poured into commodity investment funds since 2004, as opposed to just $25 billion into equity funds) has transformed these markets, increasing price levels and price volatility, and opening up many opportunities for manipulation.

Some of the richest opportunities for such manipulation lie in combining control of physical commodities with dominance of commodity derivatives and futures markets. The major banks are, of course, key dealers in these derivatives markets. Control of physical commodities allows them to both forecast and influence the spot commodity prices that can determine derivatives pricing. Indeed, some observers have pointed out that bank involvement in warehousing has allowed them to conceal information from the markets on the true supply of physical commodities, creating market squeezes and artificially fueling investor appetite for commodity futures.

Big financial players are constantly seeking new ways to take advantage of this nexus. For example, the Securities and Exchange Commission recently approved the applications of JP Morgan and BlackRock for exchange traded funds (ETFs) that will be backed by physical copper. These funds will store physical copper in bank-owned warehouses to back investor shares in the ETF – potentially creating an investor-funded squeeze in the physical copper markets that would raise commodity prices and make market manipulation easier.

The potential conflicts of interest and opportunities for manipulation created by the combination of a dominant position in derivatives markets and a dominant position in actual commodity infrastructure are one reason why the traditional division between banking and commerce makes sense. Banks have a central role in the economy, thanks to their key position in the financial markets, their enormous balance sheet resources supported by leverage levels available to no other industry and their privileged access to liquidity. Unless the scope of their activities is restricted, they have too many opportunities for abuse of market power. As law professor Saule Omarova testified yesterday, Americans have traditionally viewed “large aggregations of financial power in the hands of a few money trusts with great suspicion.” Such aggregation of power is the inevitable result of a failure to separate banking and commerce.

Regulators and legislators can and should take action to limit bank involvement in physical commodities:

With increased public scrutiny of the issue, the Federal Reserve announced last Friday that it will review and reconsider its 2003 decision on the scope of commodity activities that it defines as “complementary” to banking and therefore permissible for banks. Reconsideration should lead the Fed to place stricter limits on bank commodity activities.

Both regulators and Congress need to reexamine the interpretation and impact of the “grandfathering” provision in the 1999 Gramm-Leach-Bliley Act. Goldman Sachs and Morgan Stanley, who only converted to financial holding companies in 2008, will likely try to rely on this provision to argue that they should be allowed to continue commodity activities.

Regulators and Congress also need to establish clear responsibilities for preventing manipulation of physical commodity markets. Right now, it’s not clear who has this job. The prudential banking regulators do not see the integrity of commodity markets as part of their mandate, even though the institutions they regulate have enormous capacity to manipulate these markets. The Commodity Futures Trading Commission regulates commodity derivatives markets, but not the markets for physical commodities. The Federal Energy Regulatory Commission does regulate spot markets in energy, but not in other physical commodities. The Securities and Exchange Commission regulates securities markets but not commodity markets. And the Justice Department has generalized anti-trust authority to prevent abuse of market power, but lacks the depth of experience and resources to provide a consistent presence policing commodity markets. It’s crucial to get a cop on this beat.

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